A New Way to Sidestep Currency Conversion Costs

One of my biggest frustrations as an ETF investor is that so few online brokerages allow you to hold US dollars in registered accounts. Last year BMO InvestorLine became just the fourth brokerage to add this feature, following RBC Direct Investing, Questrade and Qtrade.

A few other brokerages offer partial solutions: TD Waterhouse, for example, allows you wash your trade if you’re selling one US security and buying another in an RRSP. But that doesn’t help you if you have new US dollars your want to contribute to your registered accounts.

My own brokerage, Scotia iTrade, offers a so-called US-Friendly RRSP. For a flat fee of $30 per quarter, you can buy US securities in your RRSP with Canadian dollars and avoid the usual spread, which is about 1.5%. I test-drove this service last year, and it’s adequate if you’re making a large transaction once a year. But I’m not going to pay $120 annually for it. Especially now that I’ve discovered a solution for sidestepping currency exchange fees in RRSPs—a solution that should work at any brokerage.

Four simple steps

Although most brokerages do not allow you to hold US dollars in RRSPs, they all allow you to do so in non-registered accounts. So here’s the technique: you buy the New York–listed ETF in US dollars in a non-registered account, and then transfer it in-kind to your RRSP. I tried out the strategy this month, and it worked without a hitch.

If you already have US cash in a bank account, follow these steps:

Open a non-registered account with the same brokerage where you hold your RRSP. (Make sure the account carries no annual fee.) It took about a week for my new account to be up and running, as I had to send some paperwork by mail.

Link the non-registered account to your US-dollar bank account so you can transfer funds without converting the currency. My US-dollar bank account is also at Scotiabank, so this was simple, but it may be more problematic if your brokerage account and your bank account are with two different institutions.

Transfer US dollars from the bank account to the non-registered brokerage account and use this money to buy shares of a US-listed ETF. I bought additional shares of Vanguard’s Total International Stock ETF (VXUS), a core holding in my RRSP. Because the purchase was made with US dollars, I paid no currency conversion fee. My only cost was the $10 trading commission, which I would have had to pay anyway.

Transfer the ETF shares in-kind from the non-registered account to the RRSP. At Scotia iTrade, there is a simple online form for this transfer request and it took about 30 seconds. If your brokerage does not offer this service online, you may have to call customer service. Once the transfer is complete, you will receive credit for an RRSP contribution equal to the market value of the shares in Canadian dollars.

The tax consequences

This sleight of hand may not be entirely without tax consequences. An in-kind transfer to an RRSP triggers a deemed disposition, meaning the Canada Revenue Agency treats it as though you sold the shares. If your ETF goes up in value between the time you buy it and the time you transfer it, you’ll incur a taxable capital gain. Unfortunately, if the value of the shares falls, you cannot claim a capital loss.

This is a rather small risk, however, as you can transfer the shares almost immediately. I filled out the online form the day after I made the purchase—I didn’t even wait for the trade to settle—and the shares showed up in my RRSP the following day. Because you pay a trading commission and a bid-ask spread when you purchase the ETF shares, you’re already starting with a small loss. So for you to incur a significant tax hit, the market would have to move up quickly and dramatically. Even then, the tax bill would likely be lower than the currency conversion fee you would have paid.

A gambit to call my own

Even if you don’t have a US-dollar bank account, you can still use this trick if you start with Canadian dollars. Simply transfer your loonies from your bank account to the Canadian side of your non-registered account and then use Norbert’s gambit to convert the currency before you make your ETF purchase.

You can do this using the Horizons US Dollar Currency ETF (DLR and DLR.U), which trades for free at Scotia iTrade. I tried this method as well, and it works fine, although I did have to wait three days for the DLR trade to settle before customer service could journal it over the US side of the account so I could sell it. The bid-ask spreads cost me about 0.20%, or $2 on every $1,000 converted.

I’ve always envied Norbert Schlenker for having a gambit attached to his name. So I invite investors everywhere to use this trick and to share it with others, but you have to refer to it as “Dan’s gambit.” I think it’s a fair exchange, don’t you?

76 Comments

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Like @madmike, I’m a long time reader, first time poster. I really enjoy reading the comments as they help to clarify my particular situation. In 2012, I setup my partner’s RSP portfolio at TD Waterhouse (TDW) with the Complete Couch Potato model portfolio, but because of this post and others writing about forex spreads, I’ve been afraid to buy the US traded ETFs, like VTI and VXUS. Instead, I purchased XWD-T and VUS-T which seemed like good alternatives in CDN$ (although I believe that they hedge currencies, which I’ve read you don’t think is good for long term investing). My plan was to stop contributing monthly to our RSP accounts so that I could make one annual lump sum investment, allowing me to use the “Dan Ram Gambit”, and transfer $US ETFs from my non-registered account “in-kind” to my RSP. However, on my third time through the comments, I finally understood the comment from @madmike that TDW does not require journalling if held in an RSP account. That simplifies the whole thing!

@CCP, can you confirm that with an account at TDW, I can avoid the forex spread by using @madmike ‘s suggestion and there is no need for me to be hording my RSP contribution limits outside my RSP and making one bulk purchase annually just to get US funds into my account without paying Forex spreads? Instead, I can get US currency in my TDW RSP with the purchase of a CDN stock cross listed on a US exchange. e.g. Royal Bank (RY) and sell it as RY-N. And I can do this right inside my TDW RSP? I have signed up for TDW auto wash, so the proceeds will go into US Money Market TDB166, which will be used to purchase my shares of VXUS and VTI. I will be charged the US$ exchange rate and 2x$9.99 commission, but no Forex currency spread. And if I understand this correctly, it is best to do all the currency exchange once annually, to avoid service charges on each transaction.

I’ve gotta say that I find this a bit confusing as TDW doesn’t currently allow you to hold US currency in your account (but a TDW rep told me this week that it is coming this year!), but they do allow you to hold US traded funds. Do VTI and VXUS pay dividends? And if so, will they be converted to CDN$ in my TDW RSP until TDW allows their registered accounts to hold US$?

@Lisa: I can’t comment on TD’s policies, as I don’t have an account there and I’m not familiar with all the details of how they handle forex transactions. However, I’m concerned that your strategy may be penny-wise and pound foolish.

By keeping your savings in a non-registered account and making one lump-sum RRSP contribution every year, you can easily miss out on a whole year’s worth of growth. Last year, for example, US and international stocks were up over 15%. Every $1,000 sitting in cash for the year would have cost about $150, plus all that future compounding.

If you’re finding it expensive or inconvenient to buy US-listed ETFs, you may just want to forget about using them. Why not simply use VFV for US equities and the TD e-Series fund for international equities (both of which are unhedged)? The higher MERs are far less of a factor than the opportunity cost of delaying your investments for a full year.

To answer your specific questions, XWD does not use hedging. And, yes, VTI and VXUS pay dividends, and these will be automatically converted to Canadian dollars in your RRSP account.

My portfolio is six figures. The analysis revealed that annual fees with commissions were lower for me to go with ETFs. I already had a no-fee self directed account with $9.99 commission and I’m comfortable trading stocks. But you also say that ETFs are good for investors who “plan to make infrequent, lump-sum contributions”. I believed from all my reading that with the couch potato portfolio, I would no longer make monthly contributions to a selection of funds. Instead, I would re-balance my portfolio annually, adding in any new contributions at that time.

I do understand the value of dollar cost averaging. Did I misunderstand your point about “infrequent contributions”. Should the average couch potato with a six figure portfolio be making more frequent ETF purchases, maybe quarterly rather than monthly? And should the purchases be spread over the six ETFs in my portfolio? (Or possibly less transactions if used to re-balance.) Or should I make monthly contributions to the e-Series mutual funds in Option 2 and then re-balance once per year with the accumulation in the e-Series funds?

@Lisa: There are few hard and fast rules when it comes to deciding between ETFs and index mutual funds. The decision really comes down to considering the all-in cost of both options and then deciding whether the higher-cost option might be worth it because of added convenience. Many investors who use the e-Series funds are in a big hurry to switch to ETFs, but they should consider that the US and international e-Series funds are even cheaper than XWD, and they’re much easier to transact than US-listed alternatives.

Regarding investors who “plan to make infrequent, lump-sum contributions,” it’s important not to put the cart before the horse. In other words, why does one plan to make infrequent contributions rather than putting in a little every month? I was thinking here about commissioned salespeople, or others whose employment does not lend itself to regular paycheques. If you can make regular contributions you probably should, not because of dollar-cost averaging, but simply because it doesn’t make sense to sit on a lot of uninvested cash for months just so you can save $10 on a trading commission here and there.

If there’s one point I want to stress above all others, it’s that MERs are just one factor in all of these decisions. Saving 5 or 10 basis points a year in MER is just not that big of a deal compared with the opportunity cost of sitting on cash or not contributing regularly, trading commissions, bid-ask spreads, currency conversion and inconvenience.

Most investors don’t have access to the e-Series funds, and the index fund alternatives in Canada are pretty poor, so ETFs are often the best alternative. Those who do have access to the e-Series often don’t appreciate how good they are.

John
February 26, 2013 at 2:40 pm

I would like to follow up on one of the questions asked earlier about RRSP swaps . I know this post is about RRSP contribution in-kind using US$ denominated securities for registered accounts that do not directly allow US currency, but does anyone know if RRSP swaps are still allowed at any of the brokerages since the 2011 Budget proposed penalties on swaps that result in an “advantage”? My current broker TDW has banned all registered swaps since then. What I wish I could do is swapping some of my US$ ETFs in my margin account with Canadian$ ETFs in my RRSP account since I have no more RRSP room left for the contribution in-kind trick described in this post. Thanks.

TJ
April 10, 2013 at 9:53 pm

Dan, your recent post on calculating ACBs tweaked this question, but I thought I’d post my question within this thread since it seems to be more relevant to the discussion here …

If you use DLR / DLR.U for the Gambit, there’s still going to be a ‘loss’ when compared to the official exchange rates for the day(s). Can a person claim these buy / sell losses as a capital loss? I realize you’re not a tax accountant … just curious if you’ve heard of anyone else doing this in the past? Thanks.

@TJ: You can only compare the prices of actual transactions: you can’t compare anything to the USD/CAD exchange rate.

smaynill
May 26, 2013 at 6:21 pm

Hi everyone,

this is the very first time I’m posting here but I’ve been reading the blog for a while. I am curious about using services from CurrencyFair, or travelex. Who really offers the best deal for foreign exchange? Would it be better than Questrade’s 0.5% for registered account? Is Nobert’s gambit better?
CurrencyFair seems appealing for people with a foreign account. I also have the opportunity to open a euro account in France and I’ll need to find something more than Norbert’s Gambit. I’d really appreciate to know what is the best deal for foreign exchange outside US$.

Victor
August 23, 2013 at 2:05 pm

Dan, I am with TD Waterhouse. I have my DLR shares journaled from CAD margin account to USD margin account yesterday. However, the shares show up as DLR, not DLR.U, in my USD margin account.

@Victor: Probably no mistake. We’ve found this occurs with several brokerages: the security appears on the US side of the account, but the ticker does not include the “.U”. You will often see a short position on the Canadian side, too, until the trade settles. It’s all very confusing. Be sure to add the “.U” to the trade order when you sell it, however.

Victor
August 23, 2013 at 5:10 pm

@Dan, I called TDW. Indeed, there is no mistake. I was told that when I sell the DLR shares to get USD, make sure that I select US Exchange.

@Victor: Actually I think TD gave you bad advice. DLR.U is denominated in USD, but it trades on the TSX, so you should not select US Exchange. This is actually a common mistake we point out to our DIY clients whenever we do Norbert’s gambit.

Victor
August 28, 2013 at 9:22 am

@Dan, you are correct. DLR.U is listed on TSX. The advice from TDW was wrong. I was able to sell my DLR shares in my USD account using DLR.U symbol.

Many thanks for your accurate advice.

Eric
October 19, 2013 at 4:50 pm

Thanks for the post! Just to confirm, this would work equally well for any registered account, be it RRSP, TFSA or RESP?

@Eric: Yes, you should be able to transfer securities in kind from a non-registered account to any type of registered account, but I recommend verifying with your brokerage before you try it.

MikeC
October 22, 2013 at 7:00 pm

Dan, a belated congratulations on your own gambit!
I have a TDW RRSP account but no US accounts so I would need to combine gambits. Could you please confirm that I’ve got this right…?
1. Open a non-registered account with TDW.
2. Move CAD into it and buy (e.g.) DLR.
3. Call TDW and request that these shares be journaled over to the USD side of the account where they show up as DLR.U (or maybe just DLR).
4. Sell all DLR.U.
5. Use these USD funds to buy (e.g.) VXUS
6. Call TDW and request a Transfer-in-kind of the VXUS shares to my RRSP acct.

Now, assuming I got all that right, this will work for any new RRSP contributions. But is there any way to take existing RRSP holdings in CAD and turn them into new USD holdings inside the RRSP? Or does this call for a new gambit?

@MikeC: It sounds like you have all the steps covered. In step 6 you may not have to call TDW: Scotia iTrade allows you to do this online, but If not sure whether that is a common feature at other brokerages.

As for existing holdings in your RRSP, what you describe is just the original Norbert’s gambit.

MikeC
October 22, 2013 at 9:03 pm

Thanks, Dan.
But as you point out, Norbert’s Gambit won’t work if the existing holdings are in a TDW RRSP account. So it looks like TDW RRSP investors can sidestep currency fees:
(a) for new contributions, using Dan’s Gambit,
(b) for reallocation of existing USD holdings, or
(c) not at all when selling the USD holdings.
Based on your earlier analysis of the breakeven point for USD funds (11 years I believe), would it make more sense for us TDW people to stick to CAD funds?

In this post I was thinking specifically about people who already have US dollars but cannot contribute these to their RRSP because they use a brokerage that does not allow USD cash holdings, such as TDW and iTrade.

That estimate about the breakeven point for US and Canadian ETFs included a lot of assumptions that may or may not hold up, so don’t put too much faith in any specific number (11 years sounds way too long). In an RRSP, the withholding tax advantage of the US-listed ETFs can’t be ignored and it’s worth using them if you are able to get a decent exchange rate.

MikeC
October 22, 2013 at 10:05 pm

That’s very good to know. I feel much better about TDW now. My only comment on the article in Cdn Capitalist is that most of us will be wanting to move the USD out of the TD U.S. Money Market Fund and into a USD ETF. That would involve another two trades increasing the total cost by another $20, would it not? Still, definitely worth it for a large enough sum.

@MikeC: There is no fee for money going in or out of a money market fund.

MikeC
October 23, 2013 at 8:08 am

@CCP: Perfect! Thanks for your helpful pointers.

JohnR
February 19, 2015 at 10:57 am

Hello

I just used Norberts gambit to concvert $10,000.00 us to cdn. Instead of using dlr and dlr.u I used royal bank ry and royal bank usa ry.(just to try something different)

I bought 10,000 dollars in royal bank stock us and then went to cdn side and sold same # of shares. On Rbc it journaled automaticaly.

I saved approx $133.00 (1%) or so on using Norberts gambit as oppossed to straight currency conversion with RBC Direct.

PS I called RBC direct and they said everything was done properly and you get the exchange rate for that day even though trade doesnt settle for 3 business days.

Darby
March 28, 2015 at 6:13 am

Just to update the information on TD Direct Investing. They now allow USD to be held in registered accounts.

Keith
July 5, 2016 at 5:54 pm

On 10 June 2016 I queried TD Direct Investing about holding USD in my RRIF. The response dated 04 July advises that I may NOT hold USD in my RRIF but that TDDI plans to make this available in late 2016.
I also asked if dividends in USD would be credited to the USD side of the account and was advised that USD denominated dividends would be converted to CAD before depositing in the CAD side of the account.

@Keith: This is pretty common, unfortunately. Even our institutional brokerage does not allow US-dollar RRIFs. It is probably still worthwhile holding US-listed securities in your RRIF if they were in your RRSP when it was converted. Yes, the dividends will be converted to CAD, but this cost will likely be offset by the lower MER and greater tax-efficiently of the US-listed funds.